In our last lesson we wrapped up our discussion on the different order types available to forex traders with a look at the Entry order. In today’s lesson we are going to continue our discussion on the logistics of forex with a look at something which is known as rollover.
What you are actually trading in the forex market is a contract which requires one currency to be exchanged for another and delivered in two business days. For example, if I buy 1 contract of EUR/JPY then I am buying 100,000 worth of Euros and selling the equivalent amount of Japanese Yen. This technically requires me to deliver the equivalent amount of Japanese Yen portion of the trade to the bank account of the party I am trading with. The party that I am trading with is then technically required to deliver the 100,000 EUR portion of the trade to my bank account in two business days.
As we are trading simply for speculation however, we do not want actual physical delivery of the currency, so the platform which we are using in our examples, and pretty much any other retail forex trading platform, will automatically role this position over to the next delivery date if the position is held past 5pm Eastern Standard Time.
It is not really important to understand all the details here as this part is done automatically. What it is important to understand however is that there is a US Dollar debit or credit made to your account for any position held past 5pm Eastern Time, to account for the interest portion of the transaction.
As with most other transactions which involve holding or borrowing money, trading currencies also involves an interest payment or credit depending on whether you are the holder of a currency or the borrower of a currency.
What this means is that if I buy USD/JPY which means I have bought US Dollars and sold Japanese Yen, then I earn interest on the US Dollars I have bought and pay interest on the Japanese Yen that I have sold in order to buy those US Dollars. The reason for this is technically what I am doing when I sell a currency, is borrowing that currency and then exchanging the borrowed currency for the equivalent amount of the currency that I am buying.
I am oversimplifying things a bit here but basically the interest rates that you pay and receive on the currencies involved in the trade, is two days worth of interest derived from the overnight interest rates of the countries whose currencies you are trading.
If you remember from module 8 of our basics of trading course in the free course section of InformedTrades.com, overnight interest rates in the United States for US Dollars are set by the Federal Reserve. Just as the United States has the Federal Reserve, other countries around the world also have central banks which set the overnight rates for their currencies.
When trading forex if you buy the currency with the higher interest rate and sell the currency with the lower interest rate, then you earn money for holding a trade past 5pm when rollover occurs, because the interest rate differential is in your favor. Conversely if you sell the currency with the higher interest rate and buy the currency with the lower interest rate then you pay interest if you hold the trade past 5pm, because the interest rate differential is not in your favor. If you open and close the position before 5pm then nothing happens as there is no rollovernecessary.
As noted above we are trading a 2 day contract in the forex market, so the interest that you either pay or receive at rollover is 2 days worth of interest, calculated based on the interest rates as set by the central banks in the countries of the currency pairs which you are trading.
Using our USD/JPY trade as an example, overnight interest rates in the United States are at 2.25% as of this lesson, and rates in Japan are at .5%.
As you can see here when we are trading the USD/JPY currency pair, if we buy then we are long (holding) US Dollars at an interest rate of 2.25% and we are short (borrowed) Japanese Yen at an interest rate of .5%. So in this example the interest rate differential is in our favor by 1.75%, so we will earn interest if we hold this position past 5pm NY Time.
If we were to sell the USD/JPY then we are short (borrowing) US Dollars at an interest rate of 2.25% and long (holding) JPY at an interest rate of .5%. So in this case the interest rate differential is against us by 1.75% so we will pay interest if we hold this position past 5pm NY Time.
I have tried to make this as simple as possible but to be upfront this is probably the most difficult concept for traders who are new to the forex
Thats our lesson for today. In tomorrow's lesson we are going to continue our rollover discussion with a look at where you go to find out whether you are going to pay or receive money for holding positions past rollover and the basics of how traders leverage this rollover concept to their advantage so we hope to see you in that lesson.
As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading! market to grasp, so if it takes a little bit of time don't worry you are not alone.
Amazing Trader is a unique approach developed by Jay Meisler to trading that utilizes proprietary technology to deliver global-view's exclusive trading levels directly to your platform in real-time.
The goal is to take your trading performance to a higher level.
13:45 US- flash SVC PMI
14:00 US- CB Confidence
14:00 US- New Homes Sales 27-Jul WED
00:30 AU- CPI
08:30 GB- GDP
12:30 US= Durable Goods
14:00 US- Pending Homes Sales
14:30 US- Crude
18:00 US- Fed Decision 28-Jul THU
07:55 DE- Employment
12:30 US- Weekly Jobless
23:30 JP- CPI 29-Jul FRI
03:00 JP- Bank of Japan
09:00 EZ- GDP, flash HICP
12:30 US- GDP
14:00 US- final U of Mich
Trading Themes --
The Federal Reserve meets on Wednesday. No rate changes are seen as likely, although a slightly less dovish tone is seen as probable following the rebound in the June Jobs data. The Fed is likely now to try to focus on a longer term view policy after a couple of embarrsassing flip-flops.
Fed Funds futures are lousy forecasts of future Fed policy but are an accurate barometer of current market sentiment. Current market odds on one Fed rate hike by year end are running a little above 50-50.
The Democratic Party Convention runs through Thursday this week with Hillary Clinton set to be proclaimed the party candidate for President in the fall. This has become yet another rancorous convention rather than the planned "coronation", after it was revealed that the Party had favored Clinton over Sanders in the primaries.
On Friday, the Bank of Japan meets. Over the weekend, Kuroda partially walked back hawkish comments made last week. He indicated the central bank would be supportive of a fiscal stimulus program. We should get some sort of BOJ commitment for additional monetary stimulus by week's end.
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The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
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Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
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